Election brings an Abbey quick fix

Rates may soon spike up. Is a short fixed-rate loan the answer?
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The Independent Online

It is over a year since the Government published the Miles report on mortgages. The report, among other measures, called on the mortgage industry to offer more long-term fixed-rate home loans.

It is over a year since the Government published the Miles report on mortgages. The report, among other measures, called on the mortgage industry to offer more long-term fixed-rate home loans.

The trend, however, could be in the opposite direction. Last week, Abbey announced a fixed-rate that lasts only until December this year. For most buyers, that will mean a fixed period of just six months.

Abbey believes that the loan will appeal to borrowers concerned about a short-term spike in interest rates. "I think there are people out there who are worried about a short-term increase after the general election, but think rates will then fall," says Gary Hockey-Morley, Abbey's director of mortgages.

The most attractive deal is available on the bank's Flexible Plus mortgage. The rate is fixed at 4.49 per cent for six months, with a maximum loan-to-value of 90 per cent and an arrangement fee of £499. Abbey's Flexible Plus mortgages have an "offsetting" facility, allowing home-owners to set their savings against their mortgage to reduce the overall interest bill. The mortgage also allows over- and under-payments.

After the six-month fixed period, the mortgage reverts to a tracker at 0.75 per cent above Bank of England base rate. That gives a current interest-rate of 5.5 per cent. Unusually for a fixed-rate, there are no early redemption penalties.

Abbey's six-month deals - there are also loans without the offsetting feature at 4.79 per cent and 4.89 per cent for loans-to-value of 75 and 95 per cent - stack up well against longer fixed-rate deals. The lender's own two-year fixed rates start at 5.14 per cent for loans of 75 per cent or under. Moneyfacts lists two-year fixed rates with the Portman and Derbyshire building societies, each at 4.68 per cent.

A six-month fixed-rate loan, however, offers little more in the way of extra security than a competitive tracker or discount deal. It may well be that interest rates rise somewhat in the next few months, but it seems unlikely that any rise will be significant. A borrower willing to gamble on rate rises could take out a six-month discount mortgage with the Barnsley building society at 4.45 per cent, or 4.48 per cent with the Portman.

And the same buyer could make longer-term savings by opting for a different loan from Abbey's own range. Ray Boulger, senior technical manager at the mortgage brokers Charcol, points out that Abbey's own Deal for Life tracker mortgages work out cheaper in the long term than taking a six-month fixed-rate initially, and then the higher follow-on rate.

Abbey's Deal for Life mortgages are flexible, and cost 0.50 per cent over base rates (currently equivalent to 5.25 per cent) for buyers who want help with mortgage fees, or 0.49 per cent above base for those who do not need the package.

If rates stay as they are now, a buyer taking the six-month fixed-rate will save 0.75 per cent initially, but will pay 0.25 per cent or 0.26 per cent more for the rest of the loan. "The small benefit of the cheaper rate is eaten up after a year or 15 months," Boulger says. He suggests that borrowers wanting to stay with Abbey should look to take out one of the lifetime tracker mortgages from the outset.

Another reason for shunning very short-term fixed-rates is that fixed-rate mortgages almost always come with quite high fees. In the case of Abbey's six-month deals, this comes to £399 for the standard loans and £499 for the flexible mortgage.

Paying such fees again after six months in order to take out another fixed-rate deal adds substantially to the total cost. Even Hockley-Morley of Abbey admits that, for most buyers who take out a fixed-rate mortgage, certainty is the most important consideration. A six-month deal gives certainty, but only for a very short period of time.

Whether other lenders follow Abbey's lead and launch very short-term fixed mortgages remains to be seen. Most economists believe that in the medium term, interest rates are likely to head down, not up.

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